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Norfolk Southern's Stock Price Grew 2.5x From Around $80 By The End of Q2 2016 To Around $200 By The End of Q2 2019, Led By Growth In Revenue, Margins, And P/E Multiple.

Total Revenue Growth

Net Income Margin Expansion

P/E Multiple Growth

No. of Shares Reduced By

#1. Revenues Could Grow 19% From $9.9 Billion In 2016 to $11.7 Billion In 2019. The Biggest Change In Revenue Is The Company's Intermodal Segment, Which Could Grow >35% During The Same Period.

Total Revenue = A + B + C

Merchandise (A)

Coal (B)

Intermodal (C)

Norfolk Southern generates its revenues primarily from various commodities freight, including merchandise, coal, and intermodal, which refers to the shipment of containers that can be moved from one form of transport to another.

Merchandise revenue grew from $6.2 billion in 2016 to $6.7 billion in 2018, and could grow to $6.9 billion in 2019. This growth will likely be led by better pricing, and a slight uptick in volume for chemicals, metals, and forest products, as an expected growth in construction will likely bode well for the railroad shipments.

Coal revenue grew from $1.5 billion in 2016 to $1.8 billion in 2018, led by strong export growth. However, revenues could decline slightly in 2019, due to trade tensions between the U.S. and other countries.

Intermodal revenue grew strongly from $2.2 billion in 2016 to $2.9 billion in 2018, and they could grow to $3.0 billion in 2019. This growth can be attributed to the capacity constraints in the trucking industry, which aided the railroad companies.

#2. Net Income Grew Grew At A Higher Pace Compared To Norfolk Southern's Revenues, Led By Margin Expansion.

Net Income = A x B

Net Income Margin (A)

Total Revenue (B)

Norfolk Southern's net income grew from $1.7 billion in 2016 to $2.7 billion in 2018, and an estimated $2.9 billion in 2019.

This can be attributed to higher revenues and growth in net income margin.

Net income margin grew from 17% in 2016 to around 23% in 2018, and we forecast it to be 24% in 2019, led by the company's efforts to bring down its operating ratio.

#2.1 Total Expenses Could Increase From $8.2 Billion In 2016 To $8.9 Billion In 2019. However, Total Costs As A Percentage of Revenue Have Been On A Decline.

Total Expenses

Total Expenses As % of Revenue

Compensation & Benefits As % of Revenue

While Norfolk Southern's total expenses grew from $8.2 billion in 2016 to $8.8 billion in 2018, and an estimated $8.9 billion in 2019, total expenses as % of revenue declined from 83% in 2016 to 77% in 2018, and an estimated 76% in 2019.

Compensation & benefits as % of revenue also declined from 28% in 2016 to 26% in 2018, and it is estimated to decline to 25% in 2019.

Purchased Services & Rents As % of Revenue

Fuel As % of Revenue

Depreciation As % of Revenue

Purchased services & rent as % of revenue declined from 16% in 2016 to 15% in 2018, and 2019E.

Fuel as % of revenue grew from 7.1% in 2016 to 9.5% in 2018, and it could grow slightly to 10% in 2019.

Depreciation as % of revenue has been declining gradually from 10.4% in 2016 to 9.6% in 2018, and it is estimated to be 9.4% in 2019.

Materials & Other As % of Revenue

Interest & Other Expense As % of Revenue

Effective Tax Rate

Materials & others as % of revenue has declined from 8.1% in 2016 to 5.7% in 2018, and it could decline further to 5.5% in 2019.

Interest & other expenses as % of revenue declined from 5.0% in 2016 to 4.3% in 2018, and 2019E.

Effective tax rate has fluctuated in the recent years. It fell from 35.4% in 2016 to 23.1% in 2018, and an estimated 22.4% in 2019. Note that effective tax rate is derived of adjusted taxes for 2017.

#2.2 EPS Has Also Seen Steady Growth, Led By Revenue & Margin Growth, And Lower Share Count.

Earnings Per Share = A ÷ B

Net Income (A)

No. of Shares (B)

EPS grew from $5.64 in 2016 to $9.51 in 2018, and an estimated $10.70 in 2019.

This can be attributed to higher net income, driven by higher revenues and margin expansion, as discussed above.

No. of shares declined from 296 million in 2016 to 280 million in 2018, and an estimated 264 million in 2019.

#3. Price To Earnings Multiple for Norfolk Southern Grew >30% From 14.1x in 2016 To 18.5x in 2019 (End of Q2).

P/E Multiple = A ÷ B

Price At The End of Q2 (A)

Earnings Per Share (B)

Norfolk Southern's price to earnings multiple grew from 14.1x in 2016 to 18.5x in 2019, based on 2019 expected earnings.

The growth in multiple can partly be attributed to better performance of the company, and its focus on bringing down the operating ratio, along with growth in its intermodal and merchandise freight.

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